LA broadcast: The increasing prevalence of aggressive EBITDA adjustments

Operators and investors,

As I'm spending the second half of March between strategic meetings in Los Angeles, I've already sat in nearly a dozen meetings around valuations and M&A opportunities - between executive leaders and PE partners, M&A advisors and microcap PE firms, PR consultants fielding opportunities, and consultants scouting for available deals.

Some financial, most strategic deals, but all tied to company health and financial performance (usually calculated differently in each deck or P&L report).

The elephant in the M&A room

EBITDA adjustments are undergoing an extreme cycle that is nearing the tipping point. The hard truth is that many PE firms are still signing off on reporting adjustments that obscure the real P&L performance & operational health.

I recently reviewed a target company's financials for a $70M acquisition where adjustments sliced "non-recurring" expenses by nearly 20% from their unadjusted EBITDA, turning a modest profit into a strong one, mostly through reclassifying ongoing operational costs.

What was previously considered creative accounting is now flagged as a dangerous practice that inflates valuations, misleads LPs, and creates immense pressure on operating partners post-acquisition. The traditional arbitrage model of buying low & selling high is already under pressure, and these kinds of aggressive adjustments only exacerbate the problem by baking in unrealistic expectations from day one.

The illusion of adjusted EBITDA

Aggressive EBITDA adjustments have become a widespread trick to make target companies look more attractive, especially in competitive bidding environments.

This practice isn't new, but its frequency & audacity have grown, turning what should be a transparent financial metric into an opaque exercise in wishful thinking. Many "one-time" expenses often recur, just with different names, or they represent essential investments that can't simply be cut without impacting future growth.

Misleading operational health. Add-backs like "owner's compensation adjustments" or "non-recurring legal fees" can hide systemic issues. I saw one deal where a $3M "restructuring cost" add-back was a recurring annual expense under different budget lines.

Inflated valuations & multiples. When EBITDA is artificially boosted, the resulting enterprise value, often based on a major-15x multiple, becomes detached from reality. This means buyers are overpaying for businesses that will struggle to meet pro forma projections.

Post-acquisition pressure. Operating partners are then left to achieve unobtainable EBITDA targets, often leading to unsustainable cost-cutting measures that cripple long-term value creation.

Scrutinizing beyond "adjusted" figures

For LPs & GPs, the solution isn't just more diligence, but SMARTER diligence, focusing on the underlying cash flows & operational drivers. You can't rely on headline numbers when those headlines are heavily edited.

It requires a deeper dive into the specific nature of each adjustment & its recurrence probability.

Forensic P&L analysis. Don't just accept the adjustments. Map each add-back to general ledger accounts & scrutinize its recurrence over the last 3-5 years. I recently advised on a deal where $1.5M in "extraordinary maintenance" was added back annually for five years straight.

Cash flow reconciliation. Always cross-reference adjusted EBITDA to actual cash flow from operations. Healthy companies generate consistent operating cash, regardless of accounting adjustments. A gap larger than typical working capital variations should raise red flags.

Operational detailed look. Engage with current management to understand the why behind each adjustment. Is a "strategic consulting" expense truly one-time, or is it covering a core function that will need replacing? Does the sales team actually require a $500K annual "retention bonus" because their base pay is low?

The long-term impact on portfolio performance

The short-term gain of a higher entry multiple from aggressive adjustments often leads to significant long-term pain.

Portfolio companies struggle to hit targets, requiring more capital injections or asset write-downs. This impacts the fund's overall IRR & erodes LP trust, making future fundraising harder. We're seeing more LPs conducting their own operational diligence, going beyond the glossy CIMs.

Eroding trust & LP confidence. Funds that consistently fail to meet projected returns due to over-adjusted targets eventually face skepticism during subsequent fundraising rounds. LPs want real performance, not accounting gymnastics.

Operational strain. Management teams within portfolio companies are pushed to deliver unrealistic numbers, fostering a culture of short-termism over sustainable growth. This often results in talent churn & a decline in product quality or customer service.

Impaired exit opportunities. When it comes time to exit, these same adjustments come under scrutiny again, often leading to lower-than-expected sale prices as new buyers apply more realistic EBITDA figures.

This week, review one of your recent portfolio companies' performance against their original adjusted EBITDA projections. Look for discrepancies & understand the root causes.

If something doesn't add up, reply for some high-level overview from an outside operating partner.

Mario

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My take

Moderating a panel with venture capital firms in Europe this coming May:

Five Industry Leaders on Building the 2026 RevOps Engine

By Mario Peshev, DevriX Value creation is being remade in real-time as artificial intelligence disrupts traditional workflows, go-to-market motions become

mariopeshev.com/building-2026-revops-engine-roundup

Market insights & opportunities

HR tech consolidation shifts from sourcing tools to outcome platforms. By merging Findem's sourcing engine with Glider AI's assessment and verification layer, the stack moves from "more workflow" to "higher confidence hiring decisions."

NYU Stern calls for tighter oversight of private equity in healthcare. A new NYU Stern Center for Business and Human Rights report links PE ownership to closures, staffing cuts, and compromised services - arguing regulation hasn't kept up.

Plan the carve-out before the merger closes. Threadline's management-control structure plus Cynosure backing highlights a pattern: carve-outs win when leadership retains ownership while securing aligned long-term capital.

Deeptech is holding up while broader tech remains well below 2021. Europe's VC-backed deeptech is worth $690B and took a record 32% of 2025 VC, driven by "sovereign tech" demand across AI infra, semis, space, and defense.

Forms & Survey SaaS: A 7-year-old SaaS platform enabling users to build forms, surveys, and polls with 30+ integrations including Slack, Jira, and HubSpot. Generating ~$4K in monthly profit at exceptional 96% margins with low churn, it's priced at $230,000.

Subscription eCommerce Brand: A 5-year-old Australian subscription-based eCommerce business targeting women in business with predictable recurring revenue. Producing ~$15K in monthly profit with strong retention and 1,500 members, it's offered at $504,543.

Email & SMS Marketing Agency: A 2-year-old boutique agency specializing in email and SMS automation with high client LTV and scalable systems. Generating over AUD $33K in monthly profit at strong margins with 13 active clients, it's selling for $655,768.

Connected Hardware eCommerce Brand: A large-scale eCommerce ecosystem in the home and garden space with 185K subscribers and strong DTC presence. Generating over $120K in monthly profit with global reach and multi-market IP, it's listed at $4,923,559.

Working with me

🌐 Scaling $30M - $100M+ mid-market companies with value creation through RevOps, data engineering, and WordPress. DevriX provides full RevOps consulting + delivery with GTM enablement for PE-backed portfolio companies, traditional tech, healthcare, finance, and professional service businesses pacing toward revenue growth initiatives. Our standard retainers between $10K and $60K include revenue lifecycle services for marketing and sales leaders, FP&A for financial teams, pipeline enrichment through websites and dozens of lead sources, automations and delivery integrations, CRO and ongoing testing, product delivery and platform integration solutions, and more through our consulting solutions.

🚀 1:1 Consulting. At Growth Shuttle, I run two popular plans: Async Advisory ($3,500/mo) for $3M - $30M founders and executive teams and the smaller Strategic Growth Circle ($997/mo) for $100K - $500K entrepreneurs, agency founders, scale ups. My fractional executive plan is also available here.

📈 Building US LLCs from Europe. I help European and Asian founders scale faster through doola and their "Business in a Box" model. Also suitable for US citizens (given their bookkeeping solution), but in very high demand across Europe.

📊 Post-Merger Integration. We take on M&A initiatives with Flippa. Working closely on PMI retainers for PE companies and fast-growing startups integrating new companies within their portfolios, enabling data pipelines, and securing more deals through my personal network.

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